What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-10 · 169 added, 96 removed, 227 unchanged (54% of the section changed)

6 unchanged sentences

We are a provider of AI solutions, powered by our proprietary AI operating system, aiWARE™, to deliver differentiated products and solutions to our Commercial Enterprise and Government & Regulated Industries customers.

During the three months ended March 31, 2022, we generated revenue of $34.4 million as compared to $18.3 million during the three months ended March 31, 2021.

Our Software Products & Services grew 288% year over year, and represented 53% and 26% of our consolidated revenue during the three months ended March 31, 2022 and 2021, respectively, and our Managed Services grew 19% year over year, and represented 47% and 74% of our consolidated revenue during the three months ended March 31, 2022 and 2021, respectively.

During the three months ended March 31, 2022 our largest customer represented 31% of our consolidated revenue and during the three months ended March 31, 2021 a different customer was our largest customer, with revenues representing 10% of our consolidated revenue.

During the three and six months ended June 30, 2022, we generated revenue of $34.2 million and $68.6 million, respectively, as compared to $19.2 million and $37.5 million during the three and six months ended June 30, 2021, respectively.

Our Software Products & Services grew 256% during the six months ended June 30, 2022 compared with the same period in 2021, while our Managed Services grew 17% during the six months ended June 30, 2022 compared with the same periods in 2021.

During the three and six months ended June 30, 2022 our largest customer represented 14% and 22%, respectively, of our consolidated revenue and during the three and six months ended June 30, 2021 a different customer was our largest customer, with revenues representing 11% and 7%, respectively, of our consolidated revenue.

Significant Transactions

In March 2022, we completed an acquisition of an influencer-based management services company for total consideration of $5.8 million (the “Merger Consideration”).

The Merger Consideration consists of upfront payments of $2.0 million in cash and $1.9 million in common stock (0.1 million shares) and deferred compensation of $3.0 million payable in fiscal 2022 and 2023.

In June 2022, we completed an acquisition of VocaliD for total consideration of $3.4 million.

The total consideration consists of a cash payment of $1.6 million made at closing and deferred cash purchase price payment of $2.0 million payable in fiscal 2023, which deferred payments were estimated to have a fair value of $1.4 million on the acquisition date.

In March 2022, we completed an acquisition of an influencer-based management services company for total consideration of $5.8 million.

The total consideration consists of a cash payment of $2.0 million made at closing, $1.9 million in common stock (0.1 million shares) and deferred compensation of $3.0 million payable in fiscal 2023 and 2024, which deferred payments were estimated to have a fair value of $2.7 million on the acquisition date.

The total purchase price was decreased by $1.0 million for the settlement of a preexisting receivable and increased by $0.7 million to adjust for the cash on hand at the time of the transaction closing.

In addition, the sellers may receive up to $4.5 million in contingent earnout consideration based on achieving certain milestones tied to the entity’s financial performance in fiscal 2022 and 2023, which amount will be paid in cash.

Opportunities, Challenges and Risks

During the three months ended March 31, 2022 and 2021, we derived our revenue primarily through our Commercial Enterprise customers, and secondarily through our Government & Regulated Industries customers.

During the six months ended June 30, 2022 and 2021, we derived our revenue primarily through our Commercial Enterprise customers, and secondarily through our Government & Regulated Industries customers.

We are a leader in AI-based Software Products & Services.

Our proprietary AI operating system, aiWARE, uses machine learning algorithms, or AI models, together with a suite of powerful applications, to reveal valuable insights from vast amounts of structured and unstructured data.

In addition to the year-over-year growth of 288% in our Software Products & Services during the three months ended March 31, 2022 as compared to the prior year, we have also demonstrated our ability to grow our AI-based Managed Services, with our revenue from these Managed Services increasing 19% during the three months ended March 31, 2022 as compared to the prior year.

In addition to the year-over-year growth of 256% in our Software Products & Services during the six months ended June 30, 2022 as compared to the prior year, we have also demonstrated our ability to grow our AI-based Managed Services, with our revenue from these Managed Services increasing 17% during the six months ended June 30, 2022 as compared to the prior year.

Historically, we have derived a large portion of our Software Product & Services revenue from applications we internally developed from our aiWARE platform and actively sold across various customers.

7 unchanged sentences

However, many enterprise-level opportunities with GRI customers can involve long sales cycles, during which we must invest significant time and resources without a guarantee of success.

We may seek to acquire businesses with deep relationships and greater scale within the U.S.

We may seek to acquire

businesses with deep relationships and greater scale within the U.S.

government and within regulated industries such as energy to further accelerate our pursuit of the growth opportunities we see in this market.

2 unchanged sentences

We believe that our patented technology is uniquely suited to solving some of the most difficult challenges facing utilities today, and we see significant near and long-term opportunities to grow our revenue within this market.

Our aiWARE platform is in the early stages of deployment in the energy market, and we expect to continue making significant investments in

product, sales and engineering over the next 12 to 24 months to further develop our current and future solutions to address the opportunities in this market.

Our aiWARE platform is in the early stages of deployment in the energy market, and we expect to continue making significant investments in product, sales and engineering over the next 12 to 24 months to further develop our current and future solutions to address the opportunities in this market.

Growing our existing and new Software Products & Services customer base is critical for our success.

During the first quarter of 2022, our largest customer, Amazon, represented 31% of our consolidated revenue, as compared to 16% in the same quarter of 2021 on a pro forma basis (pro forma basis meaning the inclusion of PandoLogic as if owned by us since January 1, 2021).

Approximately 25% of the first quarter 2022 Amazon revenue was from new services, part of our land-and-expand strategy and helped to drive our customer net retention above 120% in the quarter ended March 31, 2022 as compared to the same quarter of 2021.

Moreover, we continue to grow our Software Products & Services customer base.

At the end of the first quarter of 2022, we reported 559 Software Product & Services customers, which grew 45% from March 31, 2021 on a pro forma basis.

On a pro forma basis, we also grew PandoLogic’s customer base as of March 31, 2022 over 100% year over year, and non-volume hiring revenue for the quarter ended March 31, 2022, which excludes Amazon, grew over 200% year over year.

To continue to grow our Software Product & Services and diversify our customer base, and drive increased sales within our existing customer base, we plan to continue to increase our sales and marketing spending throughout 2022 as compared with prior periods.

During the six months ended June 30, 2022, ending Software Products and Services customers grew to 594, a 42% increase year over on a pro forma basis (pro forma basis meaning the inclusion of PandoLogic as if owned by us since January 1, 2021).

While our overall customer growth has been significant, we did experience a slowdown in our Average Annual Revenue (AAR) per customer (as defined and discussed below under “—Non-GAAP Financial Measures”), which was almost entirely driven by a reduction in hiring consumption from our largest customer, Amazon.

As a result, Amazon represented 14% of our consolidated revenue in second quarter of 2022 (comprised of 11% from recurring fulfillment business and 3% from delivery service providers), as compared to 31% in Q1 2022 and 36% in the comparable period of 2021 on a pro forma basis.

This was mainly a result of Amazon efforts to reduce its hiring consumption across its fulfillment centers, which Amazon has publicly stated was a 50% reduction when compared to the second quarter of 2021.

Given Amazon’s high concentration of revenue on our consolidated results, our revenue results may fluctuate significantly year over year based upon their hiring patterns.

To reduce this risk, we have been aggressively investing in existing and growing new customers since we acquired PandoLogic in September 2021.

On a pro forma basis, we also grew PandoLogic’s customer base as of June 30, 2022 over 60% year over year and PandoLogic’s non-volume hiring revenue for the six months ended June 30, 2022, which excludes Amazon, grew over 80% year over year.

To continue to grow our Software Product & Services, diversify our customer base, and drive increased sales within our existing customer base, we plan to continue increasing our sales and marketing spending throughout the second half of 2022 as compared with prior periods.

Our business has seasonality, driven mostly by hiring patterns across PandoLogic.

Typically, hiring patterns are lowest during the first and second quarters, then increase sequentially each quarter in the second half of the year.

During the quarter ended March 31, 2022, one of our largest customers accelerated hiring in part to manage the January 2022 Omicron virus outbreak.

As a result of this, we do not expect our intelligent hiring platform revenues to sequentially improve substantially from the first quarter of 2022 to the second quarter of 2022, as part of the first half of 2022 planned revenues from this customer accelerated into early 2022.

However, we do expect the platform to normalize starting in the third quarter of 2022, and to grow comparably with prior years’ seasonality trends and in accordance with our prior expectations.

During the quarter ended March 31, 2022, Amazon accelerated hiring in part to manage the January 2022 Omicron virus outbreak.

As a result of this, our intelligent hiring platform revenues did not sequentially improve from the first quarter of 2022 to the second quarter of 2022, as part of the first half of 2022 planned revenues from this customer accelerated into early 2022.

However, we do expect the revenues to normalize starting in the third quarter of 2022, and to grow comparably with prior years’ seasonality trends and in accordance with our prior expectations.

We believe our Software Products & Services will extend the capabilities of many third-party software platforms and products that are widely used today.

3 unchanged sentences

We plan to hire additional engineers and business development resources in the near term to further accelerate our pursuit of these potential opportunities, as well as other third-party technology integrations.

For the three months ended March 31, 2022, our non-GAAP gross margin (calculated as described in “Non-GAAP Financial Measures” below) improved to 80%, compared with 74% for the three months ended March 31, 2021, driven by growth of new customers across our Software Products & Services and the addition of PandoLogic in late 2021, which generated incremental non-GAAP gross margins in excess of 80% during the three months ended March 31, 2022.

For the three and six months ended June 30, 2022, our non-GAAP gross margin (calculated as described in “Non-GAAP Financial Measures” below) improved to 80% compared with 73% for the three and six months ended June 30, 2021, driven by growth of new customers across our Software Products & Services and the addition of PandoLogic in late 2021, which generated incremental non-GAAP gross margins in excess of 80% during the three and six months ended June 30, 2022.

Our non-GAAP gross margin is impacted significantly by the mix of our Software Products & Services and our Managed Services revenue in any given period because our Managed Services revenue typically has a lower overall non-GAAP gross margin than our Software Products & Services revenue.

6 unchanged sentences

however, we expect to report substantial improvements in our consolidated operating results for the year ending December 31, 2022 as compared to the year ended December 31, 2021, driven by the growth in our software offerings and customers and the growth of PandoLogic.

Our future revenue and operating growth will rely heavily on our ability to grow and retain our Software Products & Services customer base, continue to develop and deploy quality and innovative AI-driven applications and enterprise-level offerings, provide unique and attractive content and advertising services to our customers, continue to grow in newer markets such as Government & Regulated Industries, expand aiWARE into larger and more expansive enterprise engagements and manage our corporate overhead costs.

Our future revenue

and operating growth will rely heavily on our ability to grow and retain our Software Products & Services customer base, continue to develop and deploy quality and innovative AI-driven applications and enterprise-level offerings, provide unique and attractive content and advertising services to our customers, continue to grow in newer markets such as Government & Regulated Industries, expand aiWARE into larger and more expansive enterprise engagements and manage our corporate overhead costs.

While we believe we will be successful in these endeavors, we cannot guarantee that we will succeed in generating substantial long term operating growth and profitability.

4 unchanged sentences

(i) to increase the scale of our business in markets we are in today, (ii) to accelerate growth in new markets and product categories, including expanding our existing engineering and sales resources, and (iii) to accelerate the adoption of aiWARE as the universal AI operating system through venture or market-driven opportunities.

During the three months ended March 31, 2022, we reported a non-GAAP net loss of $5.2 million as compared to $3.9 million during the three months ended March 31, 2021.

While we forecast our full year 2022 to be profitable on a non-GAAP net income basis, we do expect seasonality in our revenue and more losses in operating performance throughout the quarter ended June 30, with increased profitability during the quarters ended September 30 and December 31, driven partly from PandoLogic services.

Moreover, and to continue to grow our revenue in 2022, we will continue to make substantial investments in people, namely software engineers and sales personnel.

Through April 2022, our headcount grew approximately 25% since the beginning of 2022.

In addition, we have made substantial investments in our existing people, including higher annual raises and increased benefits, in order to compete in a challenging and constrained labor environment.

During the three and six months ended June 30, 2022, we reported a non-GAAP net loss of $7.2 million and $12.4 million, respectively, as compared to $3.9 million and $7.8 million, respectively, during the three and six months ended June 30, 2021.

We do expect seasonality in our revenue and operating performance, with increased profitability during the quarters ended September 30 and December 31, driven partly from PandoLogic services and Managed Services.

Moreover, and to continue to grow our revenue in 2022, we will continue to make targeted investments in people, namely software engineers and sales personnel.

Through June 2022, our headcount grew approximately 26% since the beginning of 2022.

In addition, we have made substantial investments in our existing employee base, including higher annual raises and increased benefits, in order to compete in a challenging and constrained labor environment.

Lastly, we are making investments in our corporate infrastructure, including new ERP and workforce systems to help us better manage the scale and growth of our business.

These investments in people and infrastructure will weigh heavier on our financial results beginning in Q2 2022 and beyond.

These investments in people and infrastructure will weigh heavier on our financial results in the second half of 2022.

If we cannot hire or retain people in a timely manner, and or are incapable of managing the scale of our operations, our growth and ultimate profitability could be accelerated or delayed.

In the three months ended March 31, 2022 and 2021, substantially all of our revenue was derived from customers located in the United States.

In the six months ended June 30, 2022 and 2021, substantially all of our revenue was derived from customers located in the United States.

We believe that there is a substantial opportunity over time for us to significantly expand our service offerings and customer base in countries outside of the United States.

In the long term, we plan to expand our business further internationally in places such as Europe, Asia Pacific and Latin America, and as a result, we expect to continue to incur significant incremental upfront expenses associated with these expansion opportunities.

Impact of the COVID-19 Pandemic

The COVID-19 outbreak emerged in late 2019 and was declared a global pandemic by the World Health Organization in March 2020.

The COVID-19 pandemic, and the actions being taken by governments worldwide to mitigate the public health consequences of the pandemic, significantly impacted the global economy.

Beginning in March 2020, we began to experience fluctuations in demand for certain services, particularly our Managed Services, a significant amount of revenue from which is typically driven by major live sporting events that were cancelled or postponed in the United States due to COVID-19.

Impact of the COVID-19 Pandemic and Other Macroeconomic Conditions

Beginning in March 2020, we began to experience fluctuations in demand for certain services, particularly our Managed Services.

Our Managed Services drive a significant amount of revenue from major live sporting events that were cancelled or postponed in the United States due to COVID-19.

While many major sporting events have resumed, future cancellations of live sporting events could have a material adverse impact on our revenue generated from our Managed Services in future quarters.

The pandemic has affected and may continue to affect some of our customers, which may further reduce the demand and/or delay purchase decisions for our products and services and may additionally impact the creditworthiness of our customers.

We have assessed the potential credit deterioration of our customers due to changes in the macroeconomic environment and have determined that no additional allowance for doubtful accounts was necessary due to credit deterioration as of March 31, 2022.

The extent to which the COVID-19 pandemic and the related macroeconomic conditions may continue to affect our financial condition or results of operations is uncertain.

The severity and duration of the pandemic and the resulting macroeconomic conditions are difficult to predict, and our revenue and operating results may be adversely impacted in future periods.

Due to the nature of our business, the effect of the COVID-19 pandemic may not be fully reflected in its results of operations until future periods.

The COVID-19 pandemic has also affected and may continue to affect some of our customers, which may further reduce the demand and/or delay purchase decisions for our products and services and may additionally impact the creditworthiness of our customers.

In addition to the ongoing COVID-19 pandemic, global economic and business activities continue to face widespread macroeconomic uncertainties, including labor shortages, inflation and monetary supply shifts, recession risks and potential disruptions from the Russia-Ukraine conflict.

We continue to actively monitor the impact of these macroeconomic factors on our financial condition, liquidity, operations, suppliers, industry and workforce, and have instituted certain cost saving measures for the third quarter as a result of these factors.

The extent of the impact of these factors on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, and the impact on our customers, partners and employees, all of which are uncertain and cannot be predicted;

however, any continued or renewed disruption resulting from these factors could negatively impact our business.

Due to the nature of our business, the effect of these macroeconomic conditions may not be fully reflected in our results of operations until future periods.

The most significant risks to our business and results of operations arising from the COVID-19 pandemic are discussed in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended December 31, 2021.

In response to the COVID-19, we took actions to control expenses, including temporarily discontinuing non-essential services and instituting controls on travel, entertainment and other expenses.

In addition, we have initiated a remote work from home policy.

We expect to continue to enforce these and other actions we deem appropriate until or when the COVID-19 pandemic is officially no longer declared a pandemic by the World Health Organization.

Non-GAAP Financial Measure

In evaluating our cash flows and financial performance, we use certain non-GAAP financial measures, including “non-GAAP gross profit,” “non-GAAP gross margin,” “non-GAAP net income (loss),” and “non-GAAP net income (loss) per share.” Non-GAAP gross profit is the Company’s revenue less its cost of revenue.

Non-GAAP Financial Measures

In evaluating our cash flows and financial performance, we use certain non-GAAP financial measures, including “Pro Forma Revenue,” “Average Annual Revenue (AAR),” “non-GAAP gross profit,” “non-GAAP gross margin,” “Non-GAAP net loss (pro forma),” “non-GAAP net income (loss),” and “non-GAAP net income (loss) per share.” Pro Forma Revenue includes historical Software Products & Services revenue from the past six fiscal quarters of each of Veritone, Inc.

and PandoLogic Ltd.

(unaudited) and presents such revenue on a combined pro forma basis treating PandoLogic Ltd.

as owned by Veritone, Inc.

since January 1, 2021.

Average Annual Revenue (AAR) is calculated as the aggregate of trailing twelve-month Software Products & Services Pro Forma Revenue divided by the average number of customers over the same period for both Veritone, Inc.

and PandoLogic Ltd.

Non-GAAP gross profit is the Company’s revenue less its cost of revenue.

Non-GAAP gross margin is defined as Non-GAAP gross profit divided by revenue.

Non-GAAP net loss (pro forma) is the Company’s net loss excluding the items set forth below presented on a combined pro forma basis treating PandoLogic Ltd.

as owned by Veritone, Inc.

January 1, 2021.

Non-GAAP net income (loss) and non-GAAP net income (loss) per share is the Company’s net income (loss) and net income (loss) per share, adjusted to exclude interest expense, provision for income taxes, depreciation expense, amortization expense, stock-based compensation expense, changes in fair value of warrant liability, changes in fair value of contingent consideration, a reserve for state sales taxes, charges related to a facility sublease, gain on sale of asset, warrant expense, acquisition and due diligence costs, and severance and executive search costs.

The results for non-GAAP net income (loss), are presented below for the three months ended March 31, 2022 and 2021.

The results for non-GAAP net income (loss), are presented below for the three and six months ended June 30 , 202 2 and 202 1 .

The items excluded from these non-GAAP financial measures, as well as a breakdown of GAAP net loss, non-GAAP net income (loss) and these excluded items between our Core Operations and Corporate, are detailed in the reconciliation below.

6 unchanged sentences

Investors should not consider this supplemental non-GAAP financial information in isolation or as a substitute for analysis of our results as reported in accordance with GAAP.

Reconciliation of GAAP net loss to Non-GAAP net loss

(in thousands)

Three Months Ended March 31,

Three Months Ended June 30,

Core Operations (1)

2 unchanged sentences

Corporate (2)

Provision for income taxes

(Benefit from) provision for income taxes

Depreciation and amortization

4 unchanged sentences

State sales tax reserve

Severance and executive search

Non-GAAP Net Income (Loss)

(in thousands)

Six Months Ended June 30,

Core Operations (1)

Corporate (2)

Core Operations (1)

Corporate (2)

(Benefit from) provision for income taxes (3)

Depreciation and amortization (3)

Stock-based compensation expense

Change in fair value of contingent consideration (3)

State sales tax reserve

Interest expense

Acquisition and due diligence costs

Charges related to sublease

5 unchanged sentences

(2) Corporate consists of general and administrative functions such as executive, finance, legal, people operations, fixed overhead expenses (including facilities and information technology expenses), other income (expenses) and taxes, and other expenses that support the entire company, including public company driven costs.

The following tables set forth the calculation of our gross profit and gross margin, followed by a reconciliation of non-GAAP to GAAP financial information presented in our condensed consolidated financial statements for three months ended March 31, 2022 and 2021.

The following tables set forth the calculation of our non-GAAP gross profit and non-GAAP gross margin, followed by a reconciliation of non-GAAP to GAAP financial information presented in our condensed consolidated financial statements for three and six months ended June 30, 2022 and 2021.

Three Months Ended

Six Months Ended

(dollars in thousands)

3 unchanged sentences

Three Months Ended

Six Months Ended

Cost of revenue

13 unchanged sentences

Stock-based compensation expense

Warrant expense

Change in fair value of contingent consideration

14 unchanged sentences

Non-GAAP loss before income taxes

Income tax provision

Income tax (benefit) provision

GAAP net loss

2 unchanged sentences

Shares used in computing non-GAAP basic and diluted net loss per share

Non-GAAP diluted net loss per share

Non-GAAP basic and diluted net loss per share

(1) Adjustments are comprised of the adjustments to GAAP cost of revenue, sales and marketing expenses, research and development expenses and general and administrative expenses and other (expense) income, net (where applicable) listed above.

2 unchanged sentences

The Software Products & Services supplemental financial information is presented on a pro forma basis, as further described below.

The supplemental financial information for our Software Products & Services include:

The supplemental financial information for our Software Products & Services includes:

(i) Software Revenue – Pro Forma, (ii) Ending Customers, (iii) Average Annual Revenue (AAR), (iv) Total New Bookings, and (iv) Gross Revenue Retention, in each case as defined in the footnotes to the table below.

9 unchanged sentences

Gross Revenue Retention (5)

(1 ) “Software Revenue - Pro Forma” includes historical Software Products & Services revenue from the past five (5) fiscal quarters of each of Veritone, Inc.

(1 ) “Software Revenue - Pro Forma” includes historical Software Products & Services revenue from the past six (6) fiscal quarters of each of Veritone, Inc.

and PandoLogic (unaudited) and presents such revenue on a combined pro forma basis treating PandoLogic as owned by Veritone, Inc.

12 unchanged sentences

As a result, we have shown the supplemental financial information on a pro forma basis for comparability.

The following table sets forth the reconciliation of pro forma revenue to revenue.

Quarter Ended

Software Products & Services Revenue

PandoLogic Revenue (1)

Software Revenue - Pro Forma

Managed Services Revenue

Total Pro Forma Revenue

Trailing Twelve Months Ended

Software Products & Services Revenue

PandoLogic Revenue (1)

Software Revenue - Pro Forma

Managed Services Revenue

Total Pro Forma Revenue

Average Number of Customers - Pro Forma

Average Annual Revenue (AAR)

Managed Services Supplemental Financial Information

The following table sets forth the results for each of the KPIs for our Managed Services.

The following table sets forth the results for each of the key performance indicators for Managed Services.

Quarter Ended

3 unchanged sentences

( 7 ) Managed Services revenue and metrics exclude content licensing and media services.

Overall, second quarter of 2022 advertising revenue was relatively flat year over year, largely driven by the timing of new and larger, event-driven campaigns by key customers in the first half of 2021 compared to the first half of 2022.

We have experienced and may continue to experience volatility in revenue from our Managed Services due to a number of factors, including:

6 unchanged sentences

Results of Operations

The following tables set forth our results of operations for the three months ended March 31, 2022 and 2021, in dollars and as a percentage of our revenue for those periods.

The following tables set forth our results of operations for the three and six months ended June 30, 2022 and 2021, in dollars and as a percentage of our revenue for those periods.

The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future.

Three Months Ended

Six Months Ended

(dollars in thousands)

8 unchanged sentences

Loss before provision for income taxes

Provision for income taxes

(Benefit) provision for income taxes

Three Months Ended

Six Months Ended

Operating expenses:

7 unchanged sentences

Loss before provision for income taxes

Provision for income taxes

Three Months Ended March 31, 2022 Compared with Three Months Ended March 31, 2021

(Benefit) provision for income taxes

Three and Six Months Ended June 30, 2022 Compared with Three and Six Months Ended June 30, 2021

Three Months Ended

Six Months Ended

June 30, 2022

Software Products & Services (1)

Managed Services

(1) Software Products & Services consists of aiWARE SaaS Solutions revenues of $9.5 million and $12.8 million for the three and six months ended June 30, 2022, respectively, as well PandoLogic revenues of $8.9 million and $23.7 million for the three and six months ended June 30, 2022.

Three Months Ended

March 31, 2022

March 31, 2021

Six Months Ended

June 30, 2021

Software Products & Services

Managed Services

(1) Software Products & Services consists of aiWARE SaaS Solutions revenues of $3.4 million and $4.7 million for the three months ended March 31, 2022 and 2021, respectively, as well PandoLogic revenues of $14.8 million for the three months ended March 31, 2022.

Commercial Enterprise (“CE”)

CE Software Products & Services revenue increased $14.0 million, or 412%, in the three months ended March 31, 2022 compared to the corresponding prior year period due primarily due to our acquisition of PandoLogic in September 2021 coupled with expanded services we provided to existing media and entertainment customers.

CE Managed Services increased $2.6 million, or 19%, in the three months ended March 31, 2022 compared to the corresponding prior year period due to growth of our licensing platform, in new advertising customers and in expanded services for existing advertising customers.

CE Software Products & Services revenue increased in the three and six months ended June 30, 2022 compared to the corresponding prior year periods due primarily due to our acquisition of PandoLogic in September 2021, coupled with expanded services we provided to existing media and entertainment customers.

The increase in CE Software Products & Services was offset in part as a result of our largest customer, Amazon, reducing its hiring consumption across its fulfillment centers, which Amazon has publicly stated was a 50% reduction when compared to the second quarter of 2021.

CE Managed Services increased in the three and six months ended June 30, 2022 compared to the corresponding prior year period due to growth of our licensing platform, in new advertising customers and in expanded services for existing advertising customers and in live events coverage as conditions return to pre-COVID levels.

Government & Regulated Industries (“GRI”)

GRI Software Products & Services revenue decreased $0.5 million or 39% in the three months ended March 31, 2022 compared to the corresponding prior year period primarily due to timing of early stage energy deliverables.

GRI Software Products & Services revenue increased $0.4 million or 94% in the three months ended June 30, 2022 compared to the corresponding prior year period while decreasing $0.1 million or 5% in the six months ended June 30, 2022 compared to the corresponding prior year period.

GRI Software Products & Services revenue from customers in certain markets, particularly government and energy customers, is often project-based and is impacted by the timing of projects.

As such, we expect that our revenue from these markets could fluctuate significantly from period to period.

Non-GAAP Gross Profit

As noted above, our non-GAAP gross profit is calculated as our revenue less our cost of revenue, as follows:

Three Months Ended

(dollars in thousands)

Cost of revenue

Non-GAAP gross profit

Non-GAAP gross margin

The increase in non-GAAP gross profit and non-GAAP gross margin in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was due primarily to growth in Software Products & Services revenue, including our acquisition of PandoLogic in September 2021, which collectively generated incremental non-GAAP gross margins in excess of 80% during the three months ended March 31, 2022.

With respect to our energy solutions, demand has accelerated since we officially launched our iDERMs product suite and presented our performance metrics against The California Independent System Operator and the results of our deployment at Tampa Electric Company.

We are now actively engaged and generating revenues from multiple operators, each with significant potential for expansion.

Operating Expenses

Three Months Ended

Six Months Ended

(dollars in thousands)

5 unchanged sentences

Cost of Revenue.

The increase in cost of revenue in the three months ended March 31, 2022 compared with the corresponding prior year periods was due primarily to our higher revenue level, as discussed above.

The increase in cost of revenue in the three and six months ended June 30, 2022 compared with the corresponding prior year periods was due primarily to our higher revenue level, as discussed above.

Cost of revenue increased at a lower rate than the increase in revenues due to the introduction of new products with higher non-GAAP gross margin contribution in the second half of 2021, including the addition of PandoLogic.

Sales and Marketing .

The increase in sales and marketing expenses of $4.6 million or 72% in the three months ended March 31, 2022 compared with the corresponding prior year period was primarily due to our acquisition of PandoLogic in September 2021, coupled with a $0.8 million increase in personnel-related costs from the addition of new sales and marketing resources.

As a percentage of revenue, sales and marketing expenses decreased to 32% in 2022 from 35% in 2021.

The increase in sales and marketing expenses in the three and six months ended June 30, 2022 compared with the corresponding prior year periods was primarily due to our acquisition of PandoLogic in September 2021, coupled with a increases in personnel-related costs from the addition of new sales and marketing resources.

As a percentage of revenue, sales and marketing expenses increased to 37% and 34% in the three and six months ended June 30, 2022, respectively, from 27% and 31% in the corresponding prior year periods.

Research and Development.

The increase in research and development expenses of $4.9 million or 99% in the three months ended March 31, 2022 compared with the corresponding prior year period was primarily due to an increase of $2.2 million in personnel-related costs from the addition of new engineering resources and our September 2021 acquisition of PandoLogic in September 2021.

As a percentage of revenue, research and development expenses increased to 29% in 2022 from 27% in 2021.

The increase in research and development expenses in the three and six months ended June 30, 2022 compared with the corresponding prior year periods was primarily due to an increase of $6.8 million and $12.1 million, respectively, in personnel-related costs from the addition of new engineering resources and our September 2021 acquisition of PandoLogic in September 2021.

As a percentage of revenue, research and development expenses increased to 32% and 31% in the three months and six months ended June 30, 2022, respectively, from 24% and 26% in the corresponding prior year periods.

General and Administrative.

General and administrative expenses decreased $2.6 million or 8% in the three months ended March 31, 2022 compared with the corresponding prior year period principally due to our acquisition of PandoLogic in September 2021.

As a percentage of revenue, general and administrative expenses declined to 84% in 2022 from 172% in 2021.

General and administrative expenses decreased by $13.

3 million or 8 5 % in the three months ended June 30, 2022 compared with the corresponding prior year periods principally due to a $13.

8 million decrease in the estimated fair value of contingent consideration due to PandoLogic for 202 2 earnout consideration, coupled with a $3.6 million decrease in stock compensation primarily for senior executive stock grants in 2021, partially offset by increases in costs from our acquisition of PandoLogic in September 2021.

General and administrative expenses decreased $ 22 .

6 million or 48 % in the six months ended June 30, 2022 compared with the corresponding prior year period principally due to a $20.2 million decrease in stock compensation expense attributable primarily to additional expense related to the vesting of performance-based stock options in 2021 , coupled with a $3.4 million one-time charge related to the sublease of our former Costa Mesa corporate office space in the first quarter of 2021, partially offset by increases in costs from our acquisition of PandoLogic in September 2021.

As a percentage of revenue, general and administrative expenses decreased to 7 % and 3 6% in the three and six months ended June 30, 2022, respectively , from 81% and 126% in the corresponding prior year periods.

Amortization Expense.

Amortization expense increased in the three months ended March 31, 2022 compared with the corresponding prior year period due to the addition of PandoLogic amortization expense.

Amortization expense increased in the three and six months ended June 30, 2022 compared with the corresponding prior year periods due to the addition of amortization expense related to our PandoLogic acquisition and our 2022 acquisitions.

Other (Expense) Income, Net

Other expense, net for the three months ended March 31, 2022 was comprised primarily of interest expense of $1.2 million due to the Convertible Notes we issued in November 2021.

Other expense, net for the three and six months ended June 30, 2022 was comprised primarily of interest expense of $1.2 million and $2.4 million, respectively, due to the Convertible Notes we issued in November 2021.

Non-GAAP Gross Profit

As noted above, our non-GAAP gross profit is calculated as our revenue less our cost of revenue, as follows:

Three Months Ended

Six Months Ended

(dollars in thousands)

Cost of revenue

Non-GAAP gross profit

Non-GAAP gross margin

The increase in non-GAAP gross profit and non-GAAP gross margin in the three and six months ended June 30, 2022 compared with the corresponding prior year periods was due primarily to growth in Software Products & Services revenue, including our acquisition of PandoLogic in September 2021, which collectively generated incremental non-GAAP gross margins in excess of 80% during the three and six months ended June 30, 2022.

Liquidity and Capital Resources

We have historically financed our business through the sale of equity and debt securities.

Our principal sources of liquidity are our cash and cash equivalents, which totaled $237.6 million as of March 31, 2022, compared with total cash and cash equivalents of $254.7 million as of December 31, 2021.

The decrease in our cash and cash equivalents in the three months ended March 31, 2022 as compared with December 31, 2021 was primarily due to investments made during the period, taxes paid related to net share settlement of equity awards, and the payment of the PandoLogic 2021 earnout.

We generated $10.1 million through cash provided by operating activities and also generated cash through proceeds from issuances of stock under employee stock incentive plans and stock purchases made under the ESPP of $0.6 million.

Our principal sources of liquidity are our cash and cash equivalents, which totaled $220.5 million as of June 30, 2022, compared with total cash and cash equivalents of $254.7 million as of December 31, 2021.

The decrease in our cash and cash equivalents in the six months ended June 30, 2022 as compared with December 31, 2021 was primarily due to investments made during the period, taxes paid related to net share settlement of equity awards, and the payment of the PandoLogic 2021 earnout.

We used $4.3 million in the six months ended June 30, 2022 in operating activities.

A summary of cash flows from our operating, investing and financing activities is shown in the table below.

Three Months Ended

Six Months Ended

(in thousands)

Cash provided by operating activities

Cash used in operating activities

Cash used in investing activities

2 unchanged sentences

Operating Activities

Our operating activities provided cash of $10.1 million in the three months ended March 31, 2022, due primarily to our net loss of $28.4 million, adjusted by $21.5 million in non-cash expenses, including $11.6 million from a change in the fair value of contingent consideration and $4.8 million in stock-based compensation expense, offset in part by the net working capital increase of $17.1 million, primarily due to decreases in our accounts receivable of $19.0 million.

Our business strategy includes streamlining operational costs while investing in the development of our AI capabilities and enhancement of our Software Products & Services to grow our business and future revenue.

We gauge the amount of cash utilized in these efforts using the Non-GAAP net loss measure, as presented under the heading “Non-GAAP Financial Measures” above.

Our use of cash as measured by Non-GAAP net loss decreased to $5.2 million for the three months ended March 31, 2022 from $3.9 million for the three months ended March 31, 2021, due primarily to the increase in our revenues, partially offset by an increase in non-GAAP expenses.

Our operating activities provided cash of $6.2 million in the three months ended March 31, 2021, due primarily to the net increase of $11.1 million of cash received from advertising clients for future payments to vendors, offset in part by the effect of our net loss of $30.6 million, adjusted by $26.0 million in non-cash expenses, including $21.6 million in stock-based compensation expense.

Our operating activities used cash of $4.3 million in the six months ended June 30, 2022, due primarily to our net loss of $25.4 million, adjusted by $11.1 million in non-cash expenses, including $10.7 million in depreciation and amortization and $9.6 million in stock-based compensation expense, offset in part by $8.8 million from a change in the fair value of contingent consideration, $1.9 million from a changes in deferred taxes and the net working capital increase of $10.0 million, primarily due to decreases in our accounts receivable of $35.6 million.

business strategy includes streamlining operational costs while investing in the development of our AI capabilities and enhancement of our Software Products & Services to grow our business and future revenue.

Our operating activities used cash of $1.0 million in the six months ended June 30, 2021, due primarily to our net loss of $43.3 million, adjusted by $33.7 million in non-cash expenses, including $28.2 million in stock-based compensation expense, offset in part by the net increase of $8.2 million of cash received from advertising clients for future payments to vendors.

Our business strategy includes streamlining operational costs while investing in the development of our AI capabilities and enhancement of our aiWARE SaaS solutions and services to grow our business and future revenue.

Investing Activities

Our investing activities for the three months ended March 31, 2022 used cash of $4.1 million primarily for an equity investment of $2.0 million in a strategic partner, $1.3 million to fund a portion of the consideration for the March 2022 acquisition, and $0.7 million in capital expenditures.

Our investing activities consisted of minimal amounts used for capital expenditures and proceeds from the sale of equipment in the three months ended March 31, 2021.

Our investing activities for the six months ended June 30, 2022 used cash of $6.9 million primarily for $2.6 million to fund a portion of the consideration for the March 2022 acquisition and the VocaliD acquisition, $2.3 million in capital expenditures and for an equity investment of $2.0 million in a strategic partner.

Our investing activities consisted of minimal amounts used for capital expenditures and proceeds from the sale of equipment in the six months ended June 30, 2021.

Financing Activities

Our financing activities for the three months ended March 31, 2022 used cash of $23.2 million, consisting of $14.4 million to pay the 2021 earnout for PandoLogic and $9.4 million to pay taxes paid related to the net share settlement of equity awards, partially offset by $0.6 million in proceeds received from the exercise of stock options and purchases of shares under our ESPP.

Our financing activities provided cash of $6.5 million for the three months ended March 31, 2021, consisting of $4.3 million in proceeds received from the exercise of stock options and purchases of shares under our ESPP and $2.3 million in proceeds received from the exercise of stock warrants.

Our financing activities for the six months ended June 30, 2022 used cash of $23.1 million, consisting of $14.4 million to pay the 2021 earnout for PandoLogic and $9.5 million to pay taxes paid related to the net share settlement of equity awards, partially offset by $0.8 million in proceeds received from the exercise of stock options and purchases of shares under our ESPP.

Our financing activities provided cash of $7.1 million in the six months ended June 30, 2021.

Net cash provided by financing activities consisted of $4.8 million received from the exercise of stock options and purchases of shares under our ESPP and $2.3 million in proceeds received from the exercise of stock warrants.

Capital Resources

As of March 31, 2022, our only debt obligations were the Convertible Notes issued in the fourth quarter of fiscal year 2021.

We have $3.0 million in purchase consideration commitments related to our March 2022 acquisition that will be paid 50% in 2023 and 50% in 2024.

As of June 30, 2022, our only debt obligations were the Convertible Notes issued in the fourth quarter of fiscal year 2021.

We have $5.0 million in purchase consideration commitments related to the March 2022 acquisition and the VocaliD acquisition that will be paid in 2023 and in 2024.

We have no other present agreements or commitments with respect to any material acquisitions of businesses or technologies or any other material capital expenditures.

4 unchanged sentences

We have not entered into any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements.

Management evaluates its accounting policies, estimates and judgments on an on-going basis.

Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances.

Actual results may differ from these estimates under different assumptions and conditions.

Our critical accounting estimates reflecting management’s estimates and judgments are described in our Annual Report on Form 10-K for the year ended December 31, 2021.

We have reviewed recently adopted accounting pronouncements and determined that the adoption of such pronouncements is not expected to have a material impact, if any, on our Consolidated Financial Statements.

Accordingly, there have been no material changes to critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis